Cash flow crisis costing manufacturing SMEs $2.9bn

Australia’s small manufacturing companies are drowning in a sea of unpaid customer bills, with $2.9bn worth of outstanding invoices crippling their ability to grow, new research has found.

The Invoice Market’s SME Cash Flow Crisis Report shows that small and medium enterprises (SMEs) in the manufacturing sector are perpetually owed on average $35,833 each, with corporate customer excuses ranging from ‘lost in the system’ and ‘in dispute’ to ‘being reviewed internally’ and ‘being processed offshore’.

Alarmingly, 37% of manufacturing SMEs have no strategy in place to manage their company cash flow, which impacts their ability to pay their housing and other living expenses. This in turn creates a disincentive to hire new staff, and makes it harder to pay existing workers. The Invoice Market CEO, Angus Sedgwick, said the findings had important implications for the manufacturing sector, which employs 856,000 people across Australia.

“One of the most striking findings of this report is that while late payments cost companies money, it is the hidden cost in time that is the most revealing,” Sedgwick said. “On average, 60% of manufacturing companies have to ask twice or three times for their bills to be paid by errant corporate customers.”

Extraordinarily, in 8% of cases, companies are forced to demand payment four or more times. According to the Australian Bureau of Statistics, 52% of manufacturing companies go out of business in the first three years of operation. Moreover, according to the Australian Securities and Investment Commission, poor cash flow is cited as a factor in 40% of all business failures. The problem is also getting worse: in the last 12 months 44% of manufacturing customers have sought to extend their payment terms, suggesting cash flow is an emerging problem for manufacturing SMEs.

Sedgwick said that contrary to popular belief that big businesses and multi-nationals treat small businesses poorly, small businesses were actually the tardiest in paying their bills to other SMEs: “This means that Australian SMEs are prepared to break their word with suppliers to help their own business. It doesn’t have to be this way. If SMEs can free up their cash flow, it will not only help their own businesses, but it will have profound benefits for national economic growth and job creation.”

Across all industries, more than 40% of SMEs typically have more than 11 invoices outstanding, collectively worth an average of $38,000. Extended across the economy, this amounts to a $76bn ‘cash flow handbrake’. Schools and health services have the lowest rate of delinquent debts of any industry in the country, suggesting that teachers and doctors are significantly more commercial, and better at managing their debtors, than other industries. Accounting, financial services, agriculture, construction and professional services companies also fare well. SMEs in hospitality and tourism, real estate services, manufacturing, advertising, transport, mining, utilities and IT suffer the longest wait times before their bills are paid.